Weekly dry bulk digest: Fundamentals show bullish light (Part 5)

Although an analysis of demand is necessary in order to project future dry bulk shipping rates, imports data aren’t widely available on a weekly basis. However, shipping rates, which reflect the difference in demand and supply, are collected on a daily basis at the London-based Baltic Exchange and published as the Baltic Dry Indexes (BDI). These indexes reflect the daily shipping rates to transport raw materials such as iron ore, coal, and grain across the ocean in the spot market. When demand outpaces supply growth, shipping rates tend to rise. But when an increase in supply doesn’t meet with demand, shipping rates fall. 1

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Baltic rates fall

Last week, the overall Baltic dry index was dragged down by Panamax and Capesize vessels, which fell from 1,172 to 1,104 and 1,987 to 1,873, respectively. Aside from the lower capacity growth we saw in Part 4, shipping rates have risen lately—mostly because of increased iron ore import to China, which makes up more than 20% of the world’s total dry bulk trade. A record-low inventory figure of ~57 million tons in March (a figure unseen for three years) and a fall of ~$40 per metric tonne (28%) since the government began tightening the property market in February are enticing traders to import more iron ore. Capesize vessels, which primarily haul major bulk materials such as iron ore and coal, have benefited most.

Iron ore prices

But as iron ore prices have risen back to where they were a few months ago, traders may refrain from importing much iron ore. The recent weakness in iron ore prices either reflects lower demand or an increase in supply from Australia and Brazil (see last week’s update). So far, it looks like the current weakness in the dry bulk shipping index is being driven by lower demand.

The two main revenue generation models in the shipping industry are spot (voyage) and time (period) charters. “Spot charters” refer to the one-time price of shipping a specific amount of raw material, while “time charters” reflect the price of borrowing a ship’s service for a specific period. “Time Charter Equivalent” (TCE), which converts spot charters (specified in $ per ton) to time charter rates ($ per day), is often used to compare companies in different markets. The two often mirror each other over the medium and long terms. ↩